The US Health Care Rip-Off

This post originally appeared on The Finance Buff.

A question posed to me by a reader turns out to be relevant to the current debate over the inclusion of a public plan option in a remade US health system. After I address the question posed, I’ll make the policy connection in the final paragraph.

Question: “I hear that the US spends a lot more per person on health care than other countries. How much of that difference is due to the price of care and how much is due to quantity of care consumed?”

The premise is correct: the US does spend more on health care than all other Organization for Economic Cooperation and Development (OECD) countries. The OECD median was 9.1% of GDP in 2005, at which time the US rate was 15.3% and the country with the second highest proportion was Switzerland at 11.6% (source). In 2009 the US will spend an estimated 17.6% of GDP on health care (source).

The relatively high US spending on health care must be due to relatively higher prices or greater health care consumption or both. The consensus in the academic literature is that price, not quantity, is the driver of costs in the US. In a thorough review of the literature, a 2007 Congressional Research Service report concludes

“[T]he United States has far fewer doctor visits per person compared with the OECD average; for hospitalizations, the United States ranks well below the OECD and is roughly comparable in terms of length of hospital stays…U.S. prices for medical care commodities and services are significantly higher than in other countries…”

Uwe Reinhardt and colleagues simply conclude “it’s the prices, stupid.” In another paper the same authors attribute higher prices to higher provider wages, lower consumer purchasing power (single payer systems in other nations can negotiate lower prices), greater supply constraints, higher administrative costs, and consumer demand for care at any cost. These ideas are echoed elsewhere. Adoption of new and costly medical technology is also blamed for increased costs.

When we spend money on health care what are we purchasing? Are we buying a specific service (like a vision exam) or are we buying a degree of health (like better vision)? Since the ultimate goal is better health there is good reason to think of the product in terms of the outcomes it produces: longevity, quality-adjusted life years (QALYs), etc.

Taking this perspective, the academic literature suggests that the US spends more on health care for poorer outcomes. Findings of this type are summarized in Tom Daschle’s Paying More but Getting Less. For instance, Americans have a lower life expectancy than other OECD countries, a point made forcefully by Anderson and Frogner. They show that the US is an outlier among OECD countries with both far greater health care spending and far lower life expectancy. They report that the US has mixed performance on other quality indicators: it is about as likely to be in the top half as in the bottom half of countries ranked.

There is no good excuse for the higher costs and poorer outcomes in the US. The US population is younger than the average OECD country, with lower rates of smoking and drinking (source). Growth of US health spending is much higher than that of other OECD countries even after controlling for population aging (source).

What do you call a transaction in which you pay more than others for the same or lower quantity and mediocre or low quality? I call it a rip-off.

The foregoing discussion suggests that in reforming the health system for the non-elderly we should not place emphasis on reducing aggregate quantity since it is not particularly high. Reducing costs via quantity reduction would require an aggregate level of health services substantially below other OECD nations. Therefore, the emphasis should be placed on driving down price, which is high, while increasing quality. These are precisely the things that could be achieved with a greater concentration of purchasing power. A popular public plan is one way, though there are others (see also Ezra Klein’s post, and that of Uwe Reinhardt). One thing seems clear based on the record; lowering price is something the current marketplace of private plans is unlikely to achieve on its own.

7 May 2009 update: A December 2009 report (and executive summary) by the McKinsey Global Institute addresses the issues discussed in this post.

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